Energy bill mandate for corn-free ethanol

December 21, 2007

WASHINGTON (AP) - By mandating a boom in ethanol output from sources other than corn, the energy bill President Bush is expected to sign presents a huge opportunity for the country's fledgling biofuels industry - and uncertainty for the transportation-fuel market. The commercial viability of making ethanol from grasses and agricultural waste is unproven, and if industry can't meet the challenge, consumers could end up paying the price. The U.S. currently produces nearly 7 billion gallons of ethanol, all of it made from corn, thanks in large part to government mandates and subsidies included in the 2005 energy bill. The 2007 bill, which passed the Senate last week and will be voted on by the House Tuesday, mandates 36 billion gallons by 2022, with 21 billion gallons coming from so-called cellulosic ethanol. There are significant obstacles to meeting this goal, however, not least of which is devising a profitable method of producing cellulosic ethanol. Other challenges include: growing enough feedstock without harming the environment and efficiently transporting it to ethanol refineries; delivering the finished fuel to pumps nationwide; and bolstering consumer demand. The lack of an adequate transportation system for biofuels and limited demand already have squeezed ethanol producers' profits this year. It is unclear how government or industry will respond if the country's ambitious cellulosic ethanol goals cannot be met, though one potential unintended consequence is higher pump prices if fuel supplies fail to match rising demand. ''In this industry, they always say cellulosic is five or six years away, but they've been saying that for the last 15 years,'' said David Swenson, an associate scientist in economics at Iowa State University. Renewable Fuels Association President Bob Dinneen heard similar concerns two years ago when critics questioned how the industry would produce a previously mandated 7.5 billion gallons by 2012 ''and we will do that by next month.'' It's not a technological issue, Dinneen said, but ''it's really a question of the marketplace and the economics ... and the bill is clearly empowering the marketplace to resolve those issues.'' Farmers in Iowa, a top ethanol producer, say the goals are achievable. ''It will take a lot of research money, a lot of coordination and cooperation but I honestly believe we can do it just like we were the first to put a man on the moon,'' said Craig Lang, president of the Iowa Farm Bureau Federation. The bill doesn't specify who would be punished if ethanol-production mandates aren't met, but one potential loser in that scenario is motorists. With the government heavily promoting an alternative to gasoline, this acts as a disincentive for oil refiners when it comes to long-term planning about increasing their own capacity. ''It introduces an enormous amount of uncertainty,'' said John Felmy, chief economist at the American Petroleum Institute. If the ethanol industry is unable to produce as much fuel as is mandated, it very well could fall on the shoulders of oil refiners to make up the difference - but the industry might not be able to add capacity quickly enough to avoid supply imbalances that drive prices higher. Another possibility is that biofuel refineries of the future will be able to make ethanol from a variety of feedstocks, said Roya Stanley, director of the Iowa Office of Energy Independence. While questions remain about how the country's next wave of ethanol expansion will play out, the message to industry is crystal clear: grow. To that end, privately held Poet, which has been investing in cellulosic for seven years Poet alone has 375 million gallons of capacity under construction including a pilot cellulosic facility in South Dakota and the expanded plant in Iowa partially funded with an Energy Department grant. There always will be peaks and valleys in any rapidly expanding industry with ''price fluctuations and boom and bust scenarios,'' he said. ''But when the dust settles, we had a highly successful industry and we will continue to have a highly successful industry.''